How to Evaluate Mutual Funds: A Practical Checklist

Before you look at any fund, answer two questions: What am I investing for? And when do I need the money?

A fund that's appropriate for a 10-year retirement goal might be completely wrong for a 2-year house down payment. Short timelines need stability. Long timelines can tolerate volatility in exchange for growth potential.

If you pick an equity fund for a 2-year goal and markets correct, you're forced to sell at a loss or delay your goal. That's not the fund's fault. That's a mismatch between timeline and fund type.

Timeline first. Fund selection second.

You see a fund that delivered 40% last year. Tempting, right?

Now check the 5-year and 10-year rolling returns. Did it deliver consistently across market cycles, or was last year an outlier?

A fund that performs reliably across market cycles can be more valuable than one with extreme fluctuations.

Fund managers take day-to-day investment decisions, but a fund’s track record is shaped by both the manager and the underlying investment process. When a fund manager changes, past performance doesn’t automatically reflect how the fund may perform going forward. Checking the tenure of the current manager helps provide context on how long they’ve been executing the strategy. Manager changes are not necessarily negative, but they can introduce differences in approach. While philosophy and process matter most, manager tenure can serve as a useful reference point when evaluating a fund.

Portfolio turnover shows how often a fund buys and sells its holdings. Higher turnover indicates more frequent changes, while lower turnover suggests a more stable approach.

Turnover helps you understand a fund’s investment style. Some strategies require active rebalancing, while others are designed to hold investments for longer periods. If a fund positions itself as long-term but shows very high turnover, it’s worth understanding the reason behind it.

Also review the portfolio structure. Check whether the fund is well diversified across sectors and securities or concentrated in a few holdings. Diversification can help manage risk, while higher concentration may increase both potential returns and volatility. What matters most is whether the portfolio structure aligns with the fund’s stated strategy and your comfort with risk.

Everyone looks at returns when markets are rising. The real test is how a fund behaves when markets fall.

During corrections, does the fund fall less than its benchmark? If the market drops 20% and the fund drops 15%, that's downside protection. If it drops 25%, it's amplifying risk without corresponding upside.

Look at downside capture ratio. A ratio below 100 means the fund falls less than the market during corrections. A ratio above 100 means it falls more.

Losing less matters more than winning big. Recovering from a 30% loss requires a 43% gain. Funds that protect on the downside make recovery easier.

Equity funds and debt funds are taxed differently. Holding periods matter. Short-term gains are taxed higher than long-term gains.

If you're considering an ELSS fund for tax savings, remember it has a mandatory 3-year lock-in. You can't touch that money even in an emergency.